UT/2022/000157 - [2024] UKUT 00346 (TCC)

We now turn to Ground 5 – that is whether, even if the FTT was correct to conclude that there had been a breach of the best judgment requirement, the FTT erred in law in setting aside the entire assessment.

Our starting point, once again, is the judgment of Carnwath LJ in Pegasus Birds. It is clear from Carnwath LJ’s judgment that, even if there is a defect in an assessment, which might call into question whether the best judgment requirement was met, it does not follow that the whole assessment should be set aside (Pegasus Birds [23]). Even if the best judgment requirement is not met, the tribunal must ask itself “whether the defect is so serious or so fundamental that justice requires the whole assessment to be set aside, or whether justice can be done simply by correcting the amount to what the tribunal finds to be a fair figure on the evidence before it” (Pegasus Birds [29]). In the vast majority of cases, the correct approach is therefore for the tribunal to adjust the amount of the assessment rather than setting aside the entire assessment. This is consistent with Carnwath LJ’s guidance to tribunals found at Pegasus Birds [38(1)] that “the tribunal should remember that its primary task is to find the correct amount of tax”.

The FTT directed itself to the guidance given by Carnwath LJ in Pegasus Birds (see FTT [658]-[659]). However, in our view, it did not follow that guidance in its consideration of the assessment on SA.

Carnwath LJ’s guidance in Pegasus Birds requires the tribunal to have regard to the “nature” of the breach in determining whether it is appropriate to set aside the entire assessment (Pegasus Birds [28]). The clear implication of Carnwath LJ’s comments in Pegasus Birds [28]-[29] is that it will only be in the most egregious of cases – typically those involving dishonesty or corruption on the part of the case officer – that justice will require that an assessment should be set aside in its entirety. In cases where the officer concerned has “consciously or unconsciously, cut corners or closed their minds to relevant material”, the correct approach will ordinarily be to adjust the amount of the assessment to a fair figure.

As we have mentioned above, the only relevant defect that the FTT identified as forming the basis of its decision to set aside the assessment was the deliberate decision of Mr Foster not to take the York Wines bank statements into account. As we have commented above, the FTT concluded that Mr Foster’s evidence in relation to the assessments was “clearly misleading”. However, despite its significant criticisms of Mr Foster’s evidence, the FTT did not find that he was dishonest or corrupt. Whilst it may be said that Mr Foster cut corners or closed his mind to the relevance of the evidence in the York Wines bank statements, in our view, the defect identified by the FTT was not of such a nature that would typically require an entire assessment to be set aside in the interests of justice.

Carnwath LJ’s guidance in Pegasus Birds also requires the tribunal to have regard to the consequences of the breach to determine whether justice can be done by adjusting the amount of the assessment (Pegasus Birds [29]).

The effect of Mr Foster’s decision not to take the York Wines bank statements into account was, according to Mr Hayhurst, beneficial to the respondents. He said this because of the way in which Mr Foster calculated the cash/bank ratio which formed the basis of his assessment. In summary, Mr Foster compared figures for sales by York Wines to SA in SA’s bank statements, which had been obtained through an exchange of information request, with figures in the SAGE accounting records of York Wines, which had been obtained as part of the investigation into Operation Rust (FTT [526]-[531]). He assumed that the difference in those figures represented alcohol that was acquired by SA and sold by SA for cash (i.e. the mirror loads). For the periods for which York Wines was trading and information was available (2004-2007), Mr Foster then produced a ratio (the cash/bank ratio) of alcohol acquired for cash sales (mirror loads) to alcohol acquired for sales which went through the bank statements. He applied that cash/bank ratio to the figures in the bank statements for years in which SA was not purchasing alcohol from York Wines to produce estimated figures for the value of alcohol that was acquired for cash sales in those years. An assumed profit margin, derived from other information available to HMRC, was then added to the estimated values of alcohol acquired for cash sales to produce an estimated value of the mirror loads in relevant years.

There were some significant assumptions in Mr Foster’s calculations. We do not need to revisit them in detail here. However, one assumption that he made was that all the debits in SA’s bank statements in the years used to determine the cash/bank ratio related to purchases of alcohol from York Wines. He made this assumption because the SA bank statements were not sufficiently detailed to identify the payees. Mr Hayhurst says the York Wine statements would have shown that not all the payments in the SA bank statements were made to York Wines and that some were made to other suppliers of alcohol. The effect would have been to increase the cash/bank ratio and so the amount of the assessment.

Mr Webster KC and Mr Gurney took issue with Mr Hayhurst’s analysis. As we have set out above, they questioned the fundamentals of Mr Foster’s methodology. Far from demonstrating that, even if the information in the York Wines bank statements had been taken into account the result would have been detrimental to the respondents, Mr Webster KC and Mr Gurney submitted that it would have produced results which showed that the methodology was simply not credible. They also questioned some of the assumptions that Mr Foster had made – principally his assumption that the debits shown in SA’s bank statements were all (or mostly all) for the purchase of alcohol.

We have considered all these submissions. Our impression from the evidence that we have heard is that the defect identified by the FTT was of a kind that was capable of being addressed by adjusting the amount of the assessment to what the FTT considered on the evidence before it to be the correct figure and, given the FTT’s conclusions on the nature of the breach, this was a case in which justice could be done in that manner. We do not, however, express a firm conclusion on that issue. We have not heard all the evidence that was before the FTT. However, it appears to us that, in reaching its decision to set aside the assessment, the FTT did not follow the guidance in Pegasus Birds. Having identified Mr Foster’s failure to take into account the York Wines bank statements as the relevant deficiency (FTT [663]) and commented on the serious nature of that breach (FTT [664]), the FTT leapt to its conclusion that it would have been necessary to set aside the assessment (FTT [664]). The FTT did not first consider whether justice could be done by correcting the amount of the assessment to what the FTT considered to be a fair figure. Even if there was a breach of the best judgment requirement, it was required to do so according to the guidance set out by Carnwath LJ at Pegasus Birds [23] and [28]-[29].

Furthermore, it was important for the FTT to make that assessment in order to fulfil its primary task, that of finding the correct amount of tax (Pegasus Birds [38(1)]). This consideration was important because, if Mr Hayhurst was correct in his submissions, the decision of Mr Foster not to take the York Wines bank statements into account had the effect that the assessment was lower than it should have been. Equally, if Mr Webster and Mr Gurney were correct in submitting that there were more fundamental problems with the quantum of the assessment, whether by reason of the problem with the debits or otherwise, there was plainly a need to consider how those problems interacted with the failure to take the York Wines bank statements into account and how that interaction affected the quantum of the assessment.

In summary therefore, if the FTT were to set aside the assessment, the case needed to fall into the category of “rare” cases identified by Carnwath LJ in Pegasus Birds. But in doing so, the FTT needed to ask itself whether the defect it had identified – the deliberate decision not to take the York Wines statements into account – was so serious or fundamental that justice required the whole of the assessment to be set aside, or whether justice could be done simply by correcting the amount of what the FTT found to be a fair figure on the evidence (Pegasus Birds [29]). The FTT did not carry out the exercise of considering what a fair figure on the evidence was or might be, and so the FTT was not in a position to answer that question. The overall effect was that the FTT appear to have been guilty of an over-rigid application of the two-stage approach, the dangers of which are highlighted by Carnwath LJ in Rahman No. 1, as quoted in Pegasus Birds [18]-[19], which we have set out above.

In our view, the FTT failed to follow the guidance set out by Carnwath LJ in Pegasus Birds (in particular, at Pegasus Birds [29] and [38]). That was an error of law. The FTT did not ask itself the required question. It follows that we also allow the appeal on Ground 5.